Hays surged 7pc to close at 99.96p, after reporting "good growth" in UK
regions and a surge in temporary and public sector jobs. Questor explains
why the stock is still a hold.

It has been five years since Hays referred to “good growth” in UK’s economic heartlands, away from the South East and the City of London. Several regions including Yorkshire, the Home Counties, Scotland and the Midlands saw “good growth” in the three months to March 31, according to the white-collar recruiter.

This is good news because it appears that the recovery, albeit a patchy one, is in earnest, spreading to areas like construction and property in the Midlands and North – what Paul Venables, Hays’ finance director, terms “real jobs”.

Overall growth in the UK was flat year-on-year, with modest quarter-on-quarter growth in the three months to March 31. This flat growth was better than expected, although analysts said the strong 17pc growth in public sector roles could be something to do with seasonal growth before the end of the fiscal year.

What is notable is the stark difference between temporary and permanent hires in the UK. The former is up over the year, by 4pc, the latter is down significantly, by 7pc. An increase in temp jobs is better than no increase in any jobs, but the fall in permanent hires reflects just how difficult it still is out there. Companies are still reluctant to take staff on permanently because of the uncertain trading conditions.

As Tom Sykes at Deutsche Bank puts it: “A low growth but volatile business environment is far more conducive to temp growth than perm growth and the greater degree of volatility will lead to structurally lower conversion, in our view.”

He added better UK lending data and vacancy data suggests a “gentle” pick up in the overall UK market. Hays’ strategy, which includes robust cost control, makes it the most interesting of the permanent-orientated companies in the long run, he said. “However, we believe that perm will remain volatile and place such stocks in a lower valuation range than seen historically so for now Hays remains Hold.”

Analysts at Oriel Securities, which also has Hays on a Hold rating, hail the recruiter’s efforts to return the UK business to profit.

However, Asia Pacific, which accounts for 28pc of group fees, dropped 14pc in the third quarter – led by Australia – with pressure in both mining and non-mining regions. Elsewhere in Europe, which saw a 4pc growth year-on-year, rates of growth are slowing, the company said.

In the “rest of world” division, net fees remained flat, where the business is primarily driven by permanent hires, and where market conditions remained “mixed and fragile”, Hays said.

Hector Forsythe at Oriel said: “The rating is asking growth to move on rapidly. The back drop doesn’t support that view and the deceleration of the important German market and the challenges in Australia remain our focus. We remain at Hold.”

However, other analysts including at Jefferies, Investec and Canaccord Genuity, had the stock on a Buy rating, with some saying that Hays remains “cheap” in a historic context.

Canaccord argues that Hays remains in a better place than its white-collar rival Michael Page, with “higher quality” businesses.

The dividend, at 2.5p in 2012, is set to rise to 2.52p in 2013 and 2.71p the year after that.

But based on a year earning multiple of 13.5 in 2012, expected to rise to 19.7 this year but fall in 2014 to 16.7, the rating is on hold.